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Bitcoins and other digital currencies – emerging tax treatment

The Digital Age has given us a whole new range of ways to conduct our business and personal dealings and a feature of this continuing evolution is the development of “Bitcoin” and other forms of digital “crypto-currencies”.

Their emergence over recent years has posed increasing problems for tax authorities around the world, primarily because of the propensity for crypto-currencies to be used for money laundering and tax evasion purposes by organised crime syndicates and others who preferred to live off the financial grid. They were also the preferred consideration of choice for consumers who shopped internationally for recreational drugs through e-channels like “Silk Road” etc, but that’s another matter.

It is increasingly common as advisors to come across New Zealand residents who possess and/or trade in Bitcoins and other similar digital “currencies”. This has proved challenging due to the lack of clarity for related tax issues. Following a set of draft rulings by the Australian Tax Office yesterday we now have a clearer idea of treatment going forward.

There is more detail at the hyperlink below, but we summarise as follows:

The ATO is adopting a similar technical approach to their IRS counterparts in the United States by holding that Bitcoin and other similar crypto-currencies will not be considered “money” or a “foreign currency” when it comes to taxation issues in Australia.

Instead the ATO says in its draft Guidance Paper that Bitcoin and its equivalents are a form of property or commodity and that transacting with Bitcoins “is akin to a barter arrangement”.

The ruling means several things in Australia, principally that:

(a) Bitcoins are not a “financial supply” for GST purposes in Australia;

(b) instead they are a taxable supply of a commodity – these supplies attract GST at 10% (all amounts converted to AUD equivalents to determine the value of supplies);

(c) Bitcoins and their ilk are an asset for Capital Gains Tax purposes; and

(d) payments of salary or wages in Bitcoins constitute a fringe benefit.

Implications for NZ tax residents

Although Inland Revenue is yet to issue an authoritative statement on the tax treatment of crypto-currency issues, New Zealand is expected to take a similar technical approach as we are often in lock-step with Australia on tax policy matters. Assuming this turns out to be the case we could reasonably anticipate that:

The supply of Bitcoins and their ilk would not be a “financial service” (and therefore exempt from GST in New Zealand) because crypto-currencies would not be considered a “currency” (chiefly due to the fact that they are not issued or controlled by a regulated central bank or similar institution).

Instead Bitcoins are likely to be considered a “good” because they would be caught by the “all kinds of personal property” element of the statutory definition in the GST Act. As such they may be capable of constituting a “taxable supply” (subject to all other requirements in the Act).

Bitcoin transactions are potentially susceptible to income tax where any of the following applies:

(a) the Bitcoins were acquired for the purpose of disposing of them [s CB 4 ITA 2007]; or

(b) a person is deemed to have a “business” of dealing in Bitcoins and/or any other property “of that kind” [CB 5]; or

(c) if all else fails (from the perspective of the Commissioner) profits from Bitcoin speculation or trading may be treated as “income under ordinary concepts” [CA 1(2)].

If there is a change of government next month Bitcoins may also be caught by any CGT legislation that might subsequently be introduced.

An FBT compliance nightmare if people in business choose to pay an “employee” in Bitcoins – our advice: just don’t go there (at least as far as staff are concerned).